Develop strategic sources of supply

Builders need to prepare and face a challenge that they haven’t seen in many years—rising material and labor costs and shortages. Passing the costs along by simply raising prices won’t be enough to solve the problem.

Charles P. Schneider, Contributing Editor

June 24, 2013

For the first time in many years, builders are upbeat, housing numbers are great, and suppliers are happy. But are these conditions the calm before the storm? Builders need to prepare and face a challenge that they haven’t seen in many years—rising material and labor costs and shortages. Passing the costs along by simply raising prices won’t be enough to solve the problem. This time around materials and labor are confronting constraints that the market will feel sooner than the industry did during previous recoveries.

If you had been tracking many of your suppliers over the last few years, like you, they downsized, right-sized, and some even went upside down and are gone. Take engineered lumber—several of the manufacturers did not just close or mothball plants, they sold them, liquidated the equipment, and eliminated capacity that supported home building when it was at its peak. What does this mean? It means that they cannot just dust off the mill, turn on the lights, and add people to restore capacity.

This scenario is not unique to engineered lumber. Almost all categories that relied heavily on new construction were hit—painters, framers, dry-wallers, and the like. Tradesmen have moved on to do something else. Given what happened before, many of them are not coming back.

Where does this leave the builder? Builders will need to focus on two things. First, strengthen your supplier relationships. Don’t switch suppliers after every bid. Rather develop strategic relationships that value consistency and availability every bit as much as the lowest cost. Be the best builder in your area to do business with. Second, manage your costs well.

Strengthen supplier relationships

Who gets the best prices, the best people, and the best service from their suppliers? From study after study that we have done about home building costs, the answer is counterintuitive. Most think the largest builders have a significant cost advantage over smaller builders. Yet, this perception is false.

Who gets the best price? Builders who are easiest to do business with. What does this finding mean? Suppliers tell us that the following characteristics are as important or maybe even more important to them than the size of the business:

•Builders who clearly and consistently communicate their scheduling needs in a way that enables suppliers to schedule their work and arrive as planned.

•Builders who know what they need at the job site so there is minimal reworking of job specs and material requirements.

•Builders who pay fast or when expected.

These practices will position you to be the best builder to do business with. Was size of order on this list? No. Were builders who jump from one supplier to another on this list? No. In fact, builders who switch constantly are in the least favorable position to develop the working relationship described above.

Builders that have long-term relationships with their suppliers get the material and labor when availability is tight. The best way to create these long-term relationships, in addition to the list above is to do the following:

•Move towards transparent, long-term pricing. Usually a form of cost-plus so that a formula can be derived and used to establish a fair price and remove pricing from the equation.

•Avoid the temptation to switch. When a new trade is willing to disrupt your established relationship by offering a temporary price reduction or a discvount that you can’t set as your new long term price, avoid that trade.

•Establish relationships and gain commitments from manufacturers, even when those products are bought by your trades. For example, roofing. Your roofer may buy the roofing materials but you can establish an agreement with the roof manufacturer to position yourself at the top of the list in the event of rationing. A buying group such as the one we run at Builder Sourcing can help with this task. In addition to preferred pricing, allocation protection can be achieved for builders of all sizes.

Manage costs well

Builders, systems, and cost management have never been a cozy triad. They seem to go against the entrepreneurial spirit of home building. A home is still the last large item manufactured outside, with manual labor, and with minimal automated support. However, if there ever was a good time to bring computers, advanced cost management, and advanced trade communication and scheduling into home building, now is that time.

Albert Einstein once said, “Everything should be made as simple as possible, but not simpler.” Systems in home building, while taking effort to setup and load with the appropriate detail, will simplify and make possible the ability to manage costs, time, and schedule. A system will enhance communication with the trades for bidding and scheduling work. Ultimately, you will end up as the best builder to work with because your company communicates clearly, pays faster, and has the smoothest running schedule.

Is it simple to get to this place? No. But reaching this point is easier to do than ever before. I know many builders that have accomplished just that at a fraction of the cost you would think and in a fraction of the time.

Conclusion

Builders are a resilient group. They have learned how to operate in the best of times and hunker down in the worst. Now they must learn how to operate in a new era—one with growth and constraints on supply. Those builders that learn to think of their suppliers as an extension of their own organization, think long-term versus short term, and make their business systems simpler but not simple, will thrive.

Charles Schneider is the CEO and founder of Builder Sourcing Corporation, a professional services and systems firm that helps builders create profit with their buying group, purchasing, and systems services. Schneider can be reached at cschneider@buildersourcing.com. His company’s website is www.BuilderSourcing.com.

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